The Week Ahead: Strength in Numbers

Foreign Exchange: The Week Ahead
Strength in Numbers
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Last year was a strong year for the USD as the currency was supported by fiscal stimulus, 4 Fed rate hikes, and above potential economic growth.  This year, fiscal stimulus is fading, the Fed is on hold and economic growth is slowing.  Based on last year’s drivers, it would reasonable to believe that the USD would be down on the year.  Instead, the USD finds itself at historical highs.

The USD positioning is reflective of global central banks also turning dovish as well as global growth slowing faster than the U.S. as protectionist policies from the U.S. weigh on market sentiment.  Moreover, Fed hikes over the past 3 years have resulted in the U.S. having an interest rate advantage which has attracted short term fund flows. 

The question then is the sustainability of USD strength at these historic levels.  If history is a guide, the current run of USD strength isn’t sustainable as similar levels in the past did not last.  In the 70s, 80s, 90s and 00s the USD found itself at similar levels.  In these instances the USD was driven higher by the longest uninterrupted period of economic expansion in history (70s), aggressive tightening (80s) and financial crises (90s, 00s).  In all these instances, the USD subsequently weakened. 

What all this implies is that, from a historical perspective, the USD is likely to weaken from its historically high level absent an exogenous catalyst such as safe haven demands from trade tensions with China or the EU (auto tariff decisions expected shortly) or a disruptive Brexit resolution.  However, under a really bad scenario, USD strength could just be the initial reaction as the Fed has more room to cut than other central banks. 

Absent these catalysts, a better outlook for the global economy could provide scope for USD weakness similar to prior episodes of USD strength of a similar magnitude.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

5/15 Poland Expectations for rates to remain unchanged at 1.50%
5/15 Indonesia Expectations for rates to remain unchanged at 6.00%
5/16 Mexico Expectations for rates to remain unchanged at 8.25%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

5/15 Retail Sales Expectations for a gain of 0.2% after a gain of 1.6%
5/15 Industrial Production Expectations for a 0.0% print after a -0.1% print
5/16 Housing Starts  Expectations for a gain to 1,209k following a 1,139k gain
5/15 Canada CPI Expectations for a gain of 0.4% after a 0.7% gain

Europe/Eurozone 

5/14 EZ Industrial Prod. Expectations for a decline of 0.3% following a -0.2% print
5/17 EZ Final CPI Expectations for YoY CPI to rise from 1.4% to 1.7%
5/14 German ZEW Expectations for a gain to 6.0 from 5.5
5/14 German Q1 GDP Expectations for a gain of 0.4%; YoY drops to 0.7%
5/14 U.K. Jobs Report Expectations for a good jobs report; UR remains at 3.9%

Asia/Japan, and New Zealand 

5/14 China Indust. Prod. Expectations for a drop from 8.5% YoY to 6.5%
5/14 China Retail Sales Expectations for a small drop from 8.7% to 8.6%
5/13 Japan Trade and CA Expectations for improvement in the CA and trade 
5/15 Aussie Jobs Report Expectations for the UR to remain at 5.0%

FORECASTS

EUR

Ever since the start of 2019, the EUR, along with many other European currencies, has remained weak as growth differentials between the U.S. and EZ continue. Price action for the EUR remains within a narrow channel with tops near 1.1350 and a bottom near 1.1075.  Within the downward bias, short term trends continue to alternate between a bullish and bearish bias lasting a few days to a week or so. In the short term, the euro has been better bid reflective of a deterioration in the U.S. – China trade talks and an unwinding of EUR/emerging market crosses.

GBP

Markets continue to remain modestly constructive and optimistic for a Brexit deal as the deadline has been extended to October 31.  But within that optimism lies multiple ongoing concerns and uncertainty. Both Tory and Labor parties recently sustained large elections losses and the potential exists for more Tory, Parliamentary, and political upheavals. Expect more range trading with the GBP closely aligned with the prospects for the euro.

JPY

For most of the year, the JPY has largely been a sidebar issue for the market with extremely narrow ranges and a lack of energy and enthusiasm for either bullish or bearish biases. Most recently, as U.S. and global equities have faltered, the JPY has become a safe haven currency again and has been a top performer this past week. Expect a steady to stronger JPY in the near term. 

CAD

RBC, our mothership, had forecast a range for the CAD for Q1 of 1.3600/$ to 1.3100$, but that range is holding up well as we move deeper into Q2. Multiple forces are at play with the Bank of Canada abandoning a further tightening bias offset by higher oil and energy prices. An ultra-strong Canadian jobs report on Friday has helped to shift sentiment but expect more range trading this week. 

CNY

Over the past few months, the CNH has been flat-lining as the Chinese authorities have indicated a pause in their stimulus measures and trade talks have dragged on. This past week has seen a change in market sentiment and dynamics with the market losing confidence of a meaningful trade agreement in the short term with the additional application of more U.S. tariffs on Chinese exports and China digging in on critical issues. The CNH weakened sharply this past week; expect a steady to weaker CNH this week.

AUD

The AUD has remained within narrow ranges partially supported by improving commodity prices but offset by mixed weak economic data and the RBA shifting to a dovish bias. The RBA chose to leave interest rates unchanged last week and is keeping all options open. Expect more sideways trading this week.
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